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Mills,. John 

On credit cycles and the origin of ooiranercial 
panics, (read December 11th, 1867) 
p [9-J-40 tab 0 

From the Transactions of the Manchester statis- 
tical society 1867 

Vol. •< r»:T5f fs 


Reproductions may not b e made mthout permission from Columbia University Libraries. 









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:?o5 3 3 




MAIN ENTRY: Manchester Statistical Society. (Manciiester^ EngJand^^ 

On cr ed i t cycies and the origin of. cornmerciai panics 

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Br John Mills 

[Read December 11th, 1867.] 


Introductory, on Method — Search for Inductions—Mr. Langton’a 
“Waves” — Periodicity of Panic — No Corresponding Regularities in General 
Trade Conditions — Nor in immediate Antecedents — Regularity discovered 
in Changes following Crisis — Results from their succession — Growth of 
Credit through Normal Cycles — Mental Origin —What is Credit?- and how 
does Panic affect it? — First, or Post Panic Period — Its Features and 
Development — Accidental Modifications — Middle, or Revival Period — 
Influence of New Firms — Increment of Capital — Third, or Speculative 
Period — Further Change of Mental Mood— Morbid Stage of Credit— Results 
of Excessive Inflation — On General Prices — On Railway Stocks — Summary 
of Subdivisions in Normal Cycle — Conclusions therefrom— Illustrations by 

Composite action of above Law, with Law of Demand and Supply of 
Capital — Equilibrium of Credit and Capital— Corrective force of Price of 
Loans — Illustrations in 1852-3, and 1H60-1 — Effect of proposed “Free 
Issues”— Loss of corrective force in morbid stage of Credit— Sources of 
supply of Capital cut off— Effect of “ Free Issues” at this stage— The Three 
Suspensions during Panic— True cause of Relief thereby afforded — Remedial 
tendency of Economic Training — Moral Cause, Moral Remedy — Appeal to 


Date. Monetary Systxim of Period. Channel of previous Speculation, &c. Special Features of Crisis. | Special Effects. 

1815-6. Inconvertible Pap('r cur -'cncy, Immense issues of paper fostered gen- 240 Country Banks failed. Great de- Destruction of Country Bank pajier 
under Bank Restriction Act eral speculation. Creation of a struction of credit. caused paper currency to rise almost 

great number of Country Banks. to par. and prepared the way for 

resumption Act of 1819. 

1825. Free Note issues, convertible South American Mining, and general Bullion raluced in Dec. to £1,260,000. When foreign exchanges became fa- 
on demand, under Peel's speculation. Overissues by Country 70 Country Banks failed. Best Gov- vorable, Bank of England began to 

Act, 1819. Banks, in face of outward drain. eminent securities inconvertible advance on a large scale, and so 

into money. restored confidence. 

1896-9. Ditto ditto ditto Foreign Loans. Railway speculations. Double, or split Crisis. Bullion in Crisis led to Committee of 1840, and 

Joint Stock Banks estab- Inflation of credit, through the new Nov., 1836, £3,840,000. Two bad Bank Act, 1844. 

lished. J. S. Banks. From 1836 to 39, great harvests, 1838-9, led to foreign drain. 

Corn speculations. Bank neglected to raise rate. Bullion 

in Sept., 1839, £2,406,000. 

1847, Regulated issues and special Grain and Railway speculations. Bullion in Banking deparement re- Bank Act suspended, but only £400,000 
metallic reserve, under duced by foreign drain to £2,588, issu^, and this not required. No 

Bank Charter Act of 1844. 000, but no run for gold. Bank infringement. 

notes in full credit. Consols almost 

1857. Ditto ditto ditto Speculation and over xdvances in Failure of Scotch and Liverpool Banks. Bank Act again suspended. Actual 

Gla.sgow and Liverpool, Vast Am- Bullion in Banking department, issues beyond limit £928,000. 

erican trade at time of American 11th Nov., £1,462,153. 


1866. Ditto ditto ditto Joint Stock Companies, under Limited Failure of Banks, Discount Com- Bank Act suspended for third time. 

Liability Act, 1862. Speculations panics, Financial Companies, and No excess over limit. Rate lO per 

in Cotton in falling Market. Over Speculative trailers. Banking re- cent, continued for three months, 

advances by Discount Companies on serve reduced to £850,000, English credit tainted abroad, for- 

Contractors’ Bills, and Ships, &c. eigners having mistaken meaning 




On Credit Cycles and the Origin of Commercial 


By John Miils. 

[Read December 11th, 1867.] 

iJt is scarcely a matter for surprise, and still less for regret, that 
every commercial crisis occurring in this country is promptly 
followed by a literature of pamphlets, discussing the phenomena 
and their supposed causes, while they are yet matters of painful 
interest to the public mind. In these disquisitions, to much that 
is serviceable in the way of local and professional evidence, there 
is usually added an abundance of wholesome homily as to the 
future, combined in some cases with emphatic appeals on behalf of 
inventions for the improvement of our system of paper currency. 
One feature these productions have in common : they deal with 
proximate causes only, or with mere a itecedents as causes ; each 
crisis appearing to be the result of its own separate accident, — 
usually some event lying on the surface of commercial history. 
The highest attempt at generalisation does not ascend 
beyond the fact — unquestionable in itself — that over-trading, in 
some form or other, is the common forerunner of Panic. Over- 
trading, however, is not an ultimate fact, and its regular recur- 
rence claims explanation quite as importunately as the tragic events 
which follow it. 


Can wo got beyond this primitive method of dealing with u pro- 
blem so momentous? Does the nature of the case permit the 
application to it of the method by which modem science biings 
physical and even social phenomena within the region of causation 
and law ? Do any, and what uniformities of sequence emerge from 
the mass of circumstances, firm and continuous enough to be made 
the basis of generalisations by which we may ascend to a point 
commanding the relation of all these events one to another? 

A first glance into the matter does not inspire much hope of 
success ill sujh an enterprise. Against a back ground of infinitely 
diverse particulars — of elements in perpetual flux, and blown about 
bjr ever varying currents of tendency, there appear, it is true, some 
events occurring in serial order; but on examination, the most 
exact and obvious of these serve only to explain themselves, gi’vdng ' 
no furtherance whatever to an enquiry into the wider and more 
disastrous fluctuations in question. I do not remember to have 
anywhere seen the results of observation in this direction more 
clearly described than in a paper read before this Society by its 
present president, Mr. Langton, in December 1857^ illustrated by a 
diagram, (showing the fluctuation? of the currency over a consider- 
able period^ on a plan which was afterwards expanded in the 
larger charts published by Professor Jevons ; and I have a natural 
pleasure in reading to you|^e following extract from that pape^ 
— now, unfortunately, out of print. 

The first thing which will be noted on inspection of this chart, is the 
quirl;erly fluctaation, exhibiting an almost invariable increase in the 
demand of the public upon the Bank, from the second week in each quarter 
up to the first week in the following one. This is accounted for by the 
gradual absorption of the means of the public through the collection of 
revenue, and the release of these funds by the payment of the dividends. 

This short and superficial wave is accompanied by another, not so easily 
detected (because sometimes absorbed in a larger movement) and more 
difficult to account for. It has an annual increment and collapse, and is 
doubtless connected with the action of the seasons upon trade. In the 
midst of other disturbances this wave may be traced in the magnitude of 
the operations of the third and loru’th quarters, and the almost invariable 





lull in the second quarter of the year ; the tliird quarter being generally 
marked by rapid increase in the demand for accommodation at the Bank. 
The culminating point of the movement originating in the third quarter of 
the year, appears to be a moment favorable to the bursting of those 
periodical storms, in which the commercial difficulties of the country find 
their crisis. 

“ These disturbances are the accompaniment of another wave, which 
appears to have a decennial period, and in the generation of which, moral 
causes have no doubt an important share.” 

The first two of the uniformities here specified clearly resolve 
themselves into those common and calculable displacements of 
Capital which result from the settlement of a due claim, — the 
same in kind as the payment of a bill or debt at maturity. They 
are simply transactions, or congeries of such, linked in regularity 
with certain dates of the calendar, with the break-up of ice in 
northern seas, or with the ingathering of the world’s harvests, 
but they tell us nothing of the occult forces which swell or 
diminish the volume of transactions through a procession of years. 
They are indeed “ waves,” as distinguished from the current 
or the tide. 

But the third kind of disturbances referred to by Mr. Langton 
is very different. Occurring with almost the same exact regularity 
as the fluctuations just noticed, there is nothing in calendars or 
seasons to give at once the signal and solution to these. So far as 
we can see, they are yoked to nothing in the steady sequences 
of the material world. We have here, therefore, facts of a new 
order, dictating the search for cause at a deeper level. And if 
this circumstance increases the difficult)’’, it also enhances the 
interest of the enquiry. The subject of commercial fluctuation 
will acquire a new dignity if it be found striking its roots far 
below the level of its physical particulars, and proving itself 
cognate with the sciences of mind. 

The first and most suggestive feature of these events, then, is 
the striking uniformity in the periods of their occurrence. Since 
Mr, Langton’s paper was written, another decade has passed, 


and brought with it one more Panic to strengthen the induction 
at which he hinted.* It is an unquestionable fact that about 
every ten years there occurs a vast and sudden increase of demand 
in the loan market, followed by a great re\ ulsion and a temporary 
destruction of credit. In the present century six of these events 
have been distinctly marked. In 1815-6, 240 country banks 
failed; in 1825, 70 banks shared the same fate; in 1836-9 a 
similar revulsion took place, but was divided into two shocks, 
probably by peculiarities of the harvests in that decade ; and of 
what occurred in 1847, 1857, and 1866 I scarcely need remind 
you, as those years will be fresh in the memories of most of those 
who hear me.f 

Now, with this portentous list before us, two conclusions 
present themselves, craving a little emphasis at the veiy outset. 
One is, that whatever we may at present think of its cause, 
of its practical importance, or of its probable continuance, the 
periodicity of commercial crisis is at any rate a fact. The 
other is, that the instances are already too numerous, regular, and 
persistent, to allow any foothold for a theory of fortuitous coin- 
cidence. There is no region of scientific enquiry in which the 
idea of so distinct and prolonged a series occurring ly accident 
would not at once be scouted. 

This first great line of uniformity hfiving then established 
itself, we naturally survey the general conditions under which 
commerce has been carried on during the present century, with 
a view to discover some corresponding and corroborative order 
of things. But in this direction the generalising instinct is 
entireh baffled. The conditions of trade and currency during 

* M. Coquelin, writing in 1848, spoke of the recurrence of Panics as 
" presqtte periodique." The two decades following brought their punctual 
contributions to the series, and the limiting adverb may surely now be 
suppressed . — Revue des Deux Mondes, 1st Nov., 1848. 

t See Synopsis of Commercial Panics in England during the present 
century. (Page fi.' 



the last six decades exhibit no uniformity whatever During 
that period the import and export trades of the country have 
enormously increased in volume, and greatly varied in their 
tributary channels. There has been a regime of inconvertible 
paper currency, a regime of free issues of convertible paper 
currency, and finally a regime of regulated issues upon a metallic 
basis. The laws of banking and mercantile association have 
been modified in every conceivable way. During the same period 
commerce has been revolutionised by the transition from monopoly 
to free trade; and the material basis of the currencies of the 
world has received a vast and sudden addition by the discoveries 
of the Californian mines in 1848, and those of Australia in 1851. 

And if, turning from these general conditions, we inspect the 
immediate antecedents, or so-called causes of Panics, we find in them 
an equally bewildering diversity. In a subordinate sense certain 
mere accidents may indeed have assigned to them the dignity of 
causes; as when we say, for instance, that the collapse of the 
great railway speculation led to the Panic of 1847 ; and that 
losses in the American trade brought on the crisis of 1857. But 
it is evident that these incidental causes do not account for the 
feature we hav’c noted as common to the whole series, that of 
regularity of occurrence. Other evmnts, equally grave in character, 
have occurred in the intervals, producing a ceitain pertuibation, 
which passed, however, without culminating in Panic. There was, for 
instance, the Russian war, which gave to English commerce some 
anxious moments. An event still more tremendous in its bearings 
on trade, the collapse of the Southern Confederaev in 1861, could 
1 only develope at the time a semi-, or pseudo-Panic, followed by 

some restoration of confidence,— the real periocUcal revulsion 
» occurring in 1866, only one year in advance of the usual decennial 

period; a small deflection from the ordinary course ot things, 
showing how little the action of the normal causes of Panic could 
be accelerated by so vast an addition of external force. 

We entirely fail, therefore, to trace, either in the general 



commercial conditions of the whole period which is the area of 1 

research, or amongst the incidents which precipitated the six 

great crises omhraced within it, any succession of things so similar 

in their nature and their order of occurrence, as to coi respond 

with the uniformity of those events. The former do not group - 

themselves in any apparent relation to the latter ; and we can no 

more infer the ixistence of such relation than we could suppose ^ 

the tidal movements of seas to correspond with the action of 

submarine volcanoes, or with the chance transit of vessels, though 

they were as huge as the Great Eastern. This remark is specially 

applicable to the popular scape-goat of cuirency legislation, of 

whose clianges the grim genius of Punic seems to take no 

cognisance whatever. The successive acts afifecting tbe medium of 


exchange in the present century have been already specified ; and 

when we add that revulsions have occurred equally under systems 

of metalli: currency, debased or pure, and under the widest 

diffusion of paper money, with or without the attribute of legal 

tender, it seems futile to look for any guiding symptom of i 

correspondence in this direction. This need not imply a doubt of 

the fact that modes of currency adjustment have a powerful 

influence in aggravating or mitigating the evils of the crisis when 

developed, and that such modes should therefore be carefully 

studied and cautiously applied ; but the lesson of facts up to this 

period is, surely, that the elements which develope commercial 

crises are too deep and subtle to be conjured out of existence by 

any legislative manipulation of currencies. 

Obtaining, then, only these negative results from the plan of 
questioning general antecedents, we may now try the effect of 
inverting the process, and, following the ordei' of the phenomena, 
enquire into the nature of the changes they indicate or produce, 
still with a view to detect the existence of any corresponding 
successional order of things. By patient use of this method I 
think we shall meet with evidence leading us up to the further 
generalisations, that the decades interposed between the great com- 

k. L 


mercial crises are normal cycles of developement of Credit under 
certain existing conditions; that during each of those decades 
commercial Credit runs through the mutations of a life, having its 
infancy, growth to maturity, diseased over-growth, and death by 
collapse ; and that each cycle is composed of well-marked normal 
stages, corresponding to these ideas in nature and succession. And 
as Credit is a thing of moral essence, the external character of 
each stage of its devolopement is traced to a parallel change of 
mental mood, and we find the whole subject embraced under the 
wider generalisation of a normal tendency of the human mind. 
To this tendency — that is, the tendeneg of the faculty of credit to 
gyQK - — may be attributed the evolution of stages in a uniform 
order, each having a distinct phenomenal character; and, opeiating 
as it does, under the existing conditions of an island nation, with 
vast accumulated wealth, of energetic temperament and a low 
average of economical training, the same tendency is determined to 
the completion of its cycle of developement within ordinary periods 
of ten years. This particular division of time we accept, of course, 
as a simple fact of observation. The number of years might have 
been five, or fifteen, or twenty ; and I have no more mission to 
account for its not being so than the astronomer has to account for 
the time occupied by the diurnal and annual revolutions of the 
earth. The one important matter is the successional order, as first 
suggested by the fact of periodicity ; and that order is important 
chiefly as a guide to parallel inductions, forming a gradus by which 
we may arrive at a true theory of cause. 

In the course of our investigation, then, we shall probably find 
that the malady of commercial crisis is not, in essence, a matter of 
the purse but of the mind^ And regret it as we may, it seems as if, 
for the present, these rapid mercantile mutations were as inevitable 
as the periodical tempests which clear the atmo.sphere of tropical 


^JPollowing the course of any one of these decennial cycles we 
shall observe that, mutatis mutandis ^ — due allowance made for 



incidental disturbances from wars, exceptional harvests, &c.-^each 
stage is, in the main, like the same stages in other cycles. 

After the violence of a crisis has subsided, it becomes clear that 
it is not upon Capital, nor even upon legitimate commerce that 
the blow has fallen heaviest. As a rule. Panics do not destroy 
Capital ; they merely reveal the extent to which it has been 
previously destroyed by its betrayal into hopelessly unproductive 
works. Capital productively fixed, Capital engaged in manufacture 
and trade, continues to fractify, though, for the time, only to that 
minimum extent of production and distribution, below which the 
current necessities of the world prevent it from falling. But 
there is a change. Something has passed away, and left an appalling 
blank behind it. It is that subtle, and, within certain limits, 
most useful agency by which inert and jealous Capital is mobilised 
and tempted forward into new channels of enterprise. That agency 
is Credit. 

Now, in defining this important element in the subject of Panics 
it is essential that nothing be misunderstood, and I am therefore 
compelled for a moment to deal with more rudimentary matters 
than I like before this Society. There is a sense in which Credit 
— even commercial Credit — never dies : if it did we should be 
reduced to the primitive stage of production and barter, limited to 
the personal wants of each individual. In this sense the value of 
some things which appear to have intrinsic value of the most solid and 
immutable kind, depends really upon Credit. I have a piece of 
gold in my pocket ; but its value is not in my pocket : it is in your 
minds and the minds of the whole human race. The intrinsic 
value of a sovereign to myself personally is so small as to be 
practically nil ; it is greatly less than that of the loaf which can 
be bought with a fortieth fraction of it. But the sovereign passes 
from my hands, and through the hands of a thousand other persons, 
by vurtuc of a mental association with universal acceptance at a 
certain high rate in exchange. That belief, credo, or Credit is its 
value : but the mental process is so instant and absolute that wo 


habitually regard the value as intrinsic ; and for all practical 
purposes it may be so designated. There are other subjects of this 
Credit or belief, in regard to which the mental process is less 
instant and absolute, but which carry with them so much of the 
association of certainty as protects them from the ordinary influence 
of Panic. Within these • limits Credit has a perennial vitality in 
the individual assurance of universal recognition. But beyond 
these limits there is an outlying mass of engagements, chiefly in a 
documentary fonn, acknowledgments of debt, with or without 
specified time of redemption— the substance of which is for the 
time invisible — and the redemption of which is a matter of more 
or less certainty, more or less doubt. It is amongst these that 
Credit, in its ordinary sense, partaking somewhat of the nature of 
faith in things unseen, has its perfect work ; and it is in relation 
to these that Credit experiences the decennial changes to which I 


Broadly defined, then, Panic is the destruction, in the mind, of a 
bundle of beliefs. As a first result of that destruction, a mass of 
paper documents, the outward expressions of those beliefs from 
which they derived their circulating force, becomes a mere dead 
residuum, lea'sdng a void which can only be filled by other agents 
possessing that vital grasp on belief which they- have lost. And the 
void imisthQ filled. The volume of transactions and engagements 
cannot immediately be reduced. But Panic, the most rigorous of 
realists, rejects the dead symbols of Credit, and exacts Capital in 
the mohlU form of currency. Suum cuique is now the universal rule, 
and everybody reclaims his own. The usual magazines of Capital 
in that form are rapidly drained, and the rate of its hire is 
proportionately raised. The Panic period is therefore maiked by 
great scarcity of mobile Capital ; because, though not less in 
quantity than before, it is drafted off into a thousand unusual 
channels to perform the functions commonly exercised by Credit. 

. L 



The first following stage, which we may call 

The Post-Panic Period, 

is marked by an exactly opposite condition — that of plethora. By 
which I mean, not merely an absolute increase in the stock of 
bullion and in private deposits with the Bank. Though the 
increase in that sense is real, the plethora is much more obvious in 
the sense of the relation between supply and demand. An increase 
of a few millions in the resources of the Bank would not be so 
much felt if it did net happen that, concurrently with such increase, 
there is a great falling off in the aggregate of obligations tendered 
for discount that is, in the demand for loans. The plethora is 
produced then : 

1st. As a secondary consequence of the new mental mood of the 
lending classes, the owners of loanable Capital. The first con- 
sequence of that mood was, as we have seen, excessive scarcity ; 
because, in the supreme moment of the crisis, the grasp of each 
capitalist closed tight upon his own means, and the Banks rushed 
to strengthen their reserves against possible emergencies. But 
when that moment has passed, and its first terror has subsided, the 
private capitalist no longer feels the instinct of self-preservation, 
demanding absolute personal possession of his means, and the 
Banks are relieved from the necessity of enormous resources in their 
own tills. The Capital thus released from durance, does not at 
once flow back into the channels of loan and discount, from which 
it had so suddenly been withdrawn. Like the uneasy swell of the 
sea after the turbulence of recent tempest, there is a remainder of 
distrust, quieter but more enduring, and this dictates a much more 
rigid selection of securities, and concentrates the deposit of loanable 
Capital upon a few important centres. Gold and notes flow back 
into the Bank, either directly, or through the deposited reserves of 
other Banks, causing a great accumulation of unused resources in 
the chief financial depot, the Bank of England. 

The prevailing mental mood, as affecting the harrowing 
classes, is equally efficient in inducing plethora. In such times it 
is as dangerous to borrow as to lend, and the inducement to borrow 


is greatly diminished. If an expansion of Credit has a tendency to 
raise prices and profits (as shown by Mr. Mill in the 1 2th chapter 
of his “ Political Economy”) the collapse of Credit has a tendency 
to depress both, and much more rapidly. The legitimate trader 
who employs, in addition to his own means, a proportion of 
borrowed Capital, under pledge of his Credit in the form of bills 
based on his transactions, has found, in the moment of crisis, the 
conjuring power of his name utterly vanished, and has been 
compelled to provide for inexorably maturing obligations by the 
forced sale of goods or produce at such prices as would tempt 
forth reluctant Capital. But he who sells thus, does not buy. 
Credit has become a curse, and he will deal in it as little as 
possible. As the effect of a wide experience of this kind on the 
part of the borrowing classes, the volume of transactions which 
arc effected by the aid of bills and discounts is largely reduced. 
This particular cause, however, of plethora, might prove but a 
transient one, if the effects of the crisis upon profits were transient. 
Other things being equal, borrowers, tempted by a low rate of 
interest, would sooner recover from Panic than lenders.^ But other 
things arc not equal. The effects of commer ual Panic gradually 
percolate through all classes. Economy, enforced on great numbers 
of people by losses from failures and from depredated investments, 
restricts their purchasing power; and a diminished wages-fund 
does the same thing in relation to the working classes. Profits are 
kept down to the stunted proportions of demand ; purchase and 
production are carried on, as we say, “ from hand to mouth ; ” and 
merchants are reduced to doing what they significantly call “ a 
retail trade.” The accumulation of unusi d Capital, therefoie, 
receives no check from an increased, or even an ordinary, creation 
of pledgeable securities to compete for loans. 

These two processes may be considered the chief internal causes 
of the plethora of unused Capital which marks the Post-Panic 
period. There is, however an external process, co-operating very 
powerfully towards the same result. It is, 

MK. JuH.N .M1U>, 

oi-d. Ihe movemeut of the foreign oxohaugus, consequent on 
the collapse of Credit. We have seen that the expansion of Credit 
tended to raise prices and profits. But as regards our foreign trade, 
there is a natural limitation and corrective of too rapid a progress 
in that respect. When prices in England lise to, or beyond the 
level of prices in other countries, foreigners, seeking of course the 
cheapest market, restrict or cease their purchases here ; the area of 
our markets is diminished, and the exchanges become adverse to 
this country. The exact contrary of this takes place when prices 
are suddenly and greatly reduced by the destruction of Credit. In 
the absence of any other disturbing force, the tendency of such an 
event is to encourage foreigners to buy from us, and to turn the 
exchanges in our favour. The diminution of imports caused by 
the concurrent inability or unwillingness of the English merchant 
to buy, contributes to the same end. The exchanges being thus 
turned in our favour, the tide of money-Capital flows towards this 
country, and helps to swell the abundance already resulting from 
the internal causes before specified. 

Under these influences the post-Panic period assumes a marked 
character which I venture to call normal, because, through an 
experience of a number of such periods, we observe an identity of 
feature in the great accumulation of unused Capital and the ruling 
of an excessively low rate of interest ; and a concurrent identity of 
mental mood in the revulsion from habitual beliefs It is of 
importance to carry with us this idea of the normalism of the 
successive phases, — because accidental modifications frequently 
occur which may distract attention from the main lines of the case, 
and seduce us into a search for remedies where they cannot be found. 
The present period, for instanee‘^^with a general resemblance to the 
corresponding periods before-named, has shown some peculiar 
features resulting from exceptional circumstances. The internal 
causes of plethora, following the mental changes of the lending 
and borrowing classes, have acted as they always did and ever will 
do, but there was considerable d ' ty in the a'- ‘ion of the external 


influence upon the foreign exchanges. The mistaken interpretation 
put by foreigners upon Lord Clarendon’s celebrated circular ; the 
unusually long retention by the Bank directors of the Panic rate 
of discount ; the existence of a prohibitory tariff in America ; and, 
above all, the universal certainty that cotton, the largest staple 
of English manufacture, and the most influential upon the course of 
general prices, was following a downward career, and would drag 
with it commodities in general ; all these things for a time 
stemmed the tide of custom which would otherwise naturally 
have flowed to our shores. English Credit was comi)romised 
abroad, and foreigners dared not buy it; English commodities 
could only be sold retail while still lower prices were 
looming in the future. Foreign exchange, therefore, refused to 
turn in our favor, and we saw the anomaly of 10 per cent, and 
3 per cent, divided by only twenty miles of sea. This deviation 
from the usual course of events in the post-Panic period does not 
weaken the doctrine of moral causes. The destruction of bcueis 
extended on this occasion beyond our shores, and determined 
the flow of Capital into other channels than that of commerce with 
England, by a simple expansion of the process occurring at home. 

But when the internal causes of plethora began to create 
sjTuptoms of returning ease, belief in England began to be re-form- 
ed, English Credit was again in the market, the exchanges were 
reversed, foreign Capital flowed in and accelerated the fall of our 
rate of interest to the level of other countries. 

The post-Panic period, thus marked by plethora of unused 
Capital and dormancy of enterprise, has commonly extended over 
two or three of the first years of these decennial cycles of CrediU 
The quai’terly and annual variations in the Bank’s resources 
proceed with their usual regularity ; but the average resers'e is one 
of steady abundance, and the rate of interest almost uniformly 
low. ^0 doubt a new confidence begins to germinate early in this 
period, but its growth is slow^ The old race of traders have still 
a vivid remembrance of a “ black Fi’iday ” or some other day of 



equally sombre hue. Time alone can steady the shattered nerves, and 
form a heal thy cicatrice over wounds so deep. And that process suffers 
rude interruptions. Houses which — survivnig the fii’st shock — were 
rendered too weak to endure through a long period of dormancy 
and doubt, occasionally succumb, and so renew unpleasant sensa- 
tions, and impede the nascent growth of Credit, f^n the main, 
however, there is progress. Speculation having long ceased to 
forestall the markets, the actual wants of the world begin to 
emphasise demand, and so to tell upon prices. New and young 
firms begin to be formed, with no drag of deterrent experience 
upon their movements, and anxious to he “ doing business.” 
Even old firms, though less eager and more wary, are wushful to 
utilise the costly apparatus they are compelled to keep up, and to 
fill the gaps in their Capital oy new gains. If, while matters 
stand thus, any .specially favorable incident should happen, as for 
instance, the clearing from the horizon of political disquiet, we 
find ourselves fairly in what we may call 

The Middle ok Eevival Period. ^ 

Dui’ing this period trade may be, and usually is, subject to 
considerable mutations, from such causes as a bad harvest, like that 
of 1853, or the Russian War, in 1854, or the American Civil War, 
in 1861 ; and the supply of loanable capital may vary, the rate 
usually ranging from 4 to 7 per cent. ; but even [while subject to 
these disturbances. Credit, in the main, continues to grow more 
robust, enterprise to increase, and profits to enlarge. In fact, and 
notwithstanding all drawbacks, this ma}^ bo considered the healthiest 
period of our commercial life, and that in which accumulations 
from real — as distinguished from merely nominal profits — attain 
their highest developemcnt. During the last decade this process 
was singularly rapid, the exports having already attained their 
maximum in 1860; and nothing can more clearly show the full- 
blooded, obstinate vitality of Credit during these middle periods 
than the fact that in the succeeding year, (1861) which saw the 





1 ^ 

outbreak of the great American convulsion, the exports only fell off 
between 1 and 2 per cent., and even in the following year (1862) 
only about 8 per cent. 

It is in these periods that new commercial and manufacturing 
concerns mostly spring into existence, tempted by the high ratio of 
current pi’ofits. We have no means of estimating, as I should 
wish, the annual accession to the ranks of competition at this or 
any other period. It has been stated that the penonnel of the 
militaiy service is changed in an average period of 12 years ; but 
assuming a much less rapid rate of changes in the commercial 
world, fit is clear that before the sixth or seventh year of the decade, 
and after two or three years of lucrative trade, there must be a 
large per centage of new men, to whom the grim stroy of past 
panics, and of the nemesis of over-speculation, is a mere myth, or 
at most a matter of hear-say tradition. We know the tendency of 
the human mind to take from present conditions the hues of a 
forecasted future ; and not less certain is the unfortunate fact that 
the existing system of culture amongst our commercial classes is 
but little adapted to correct the want of personal experience. It is 
the student who watches for movements and changes ; the great 
majority of men habitually assume that what is is what will he, 
and it is under the influence of this idea that a healthy growth 
gradually merges into dangerous inflation. ConcuiTently with this 
state of matters, the actual increment of Capital from profits begins 
to overflow the usual channels of investment ; and in seeking foi 
new channels, the hahit of contemplating a high scale of profits 
makes men look over old-fashioned modes of investment to others 

which promise better things. 

From these combined causes the middle period, marked bj 
revived trade and sound credit, changes into what may well be 


Tue Speculative Period. 

To avoid misapprehension it is needful here to explain the sense 

in which this phrase is used. If the Dictionary meaning of the 




26 :klK. JOHxV MILLS, 

word Speculation be adopted : i. e. “ tlie act or practice of buying 
stocks, or goods, &c., in the expectation of a rise of price, and of 
selling them at an advance,”^ we find that the dividing line 
between speculation and ordinary trading is very obscure, — that, in 
fact, no act of commerce is entirely free from the speculative 
element, and that speculation is more or less at work through every 
period of the Credit-cycle. It is also true that speculation is in 
many cases a very useful agent in equalising the distribution of 
commodities, and supplying the urgent wants of communities, and 
is, therefore, by no means worthy of the unqualified censure some- 
times awarded to it. Tlie whole question is one of degree and of 
conditions — of degree relatively to conditions. That is to say, an 
amount of speculative trading which at one period would bo 
moderate and healthy, would at another period be excessive and 

And I cannot but think that the main condition in determining 
this difference is the state of Credit for the time being. We have 
traced the progress of that element through two periods of its 
growth, and have noted its action in raising prices and profits. We 
noted also that speculation was carried to a trifiing extent in the 
first period, and only to a moderate extent in the second ; but, if it 
were supposable that speculation could have been indefinitely 
extended in those periods, a large extension would have been much 
less likely to prove excessive and hurtful then, than it would in the 
third period, because at that time Credit, and with it price, was 
broadly based upon a mass of unengaged Capital, and there was less 
danger of the sudden and ruinous fall of prices which always accom- 
panies a collapse of Credit. There was, in fact, a healthy equipoise 
between the two. Unfortunately, however, in the absence of 
adequate foresight and self-control, the tendency is for speculation to 
attain its most rapid growth exactly when its growth is most 
dangerous; that is, when Credit has become inflated out of pro- 
portion to the reserves of loanable Capital. And after this 

** Webster. 


inflation has commenced. Credit and speculation act upon each other 
as reciprocal stimulants. Inflated Credit, by elevating prices and 
profits, tempts to further speculation ; and speculation can only be 
carried on by multiplying instruments of Credit. 

And what is it, then, that really underlies this new condition of 
things ? It is a further change in the mental mood of traders. 
Medical men tell us of some forms of physical disease which are 
the result of a gradual exaggeration of healthy functional action, the 
transition from the healthy to the morbid state being made without 
any distinct demarcation between the two. The social mind is 
subject to similar changes. There is a morbid excess of belief, an 
hypertrophy of belief, induced by an excess of nourishment to that 
faculty of the mind. In the speculative period under review, the 
healthy confidence which marked the middle period has degenerated 
into the disease of a too facile faith. The one fact of an apparent 
profit is for the mument held as full warrant for ever new com- 
mitments. And this is not confined to the commercial classes. 
The investing class of non-traders easily takes the infection. And, 
as demand always stimulates supply, there is at such times no lack 
of channels for the inflow of this confidence; every one of them, of 
course, a Pactolus. The admirable modern invention of Joint 
Stock Companies has an almost infinite absorbent capacity ; and 
the crowd of morbid-minded investors in financial and industrial 
enterprises, of various degrees of merit, do not, in their excited 
mood, think of the pertinent questions, whether their capital will 
become quickly productive, and whether their commitment is out of 
proportion to their means. The commercial and investing classes 
thus come under an enormous amount of obligation, dependent foi 
its success upon the one precarious condition of a continuance of 
the existing scale of prices. Two things now usually occur : 

1st.— There is a line beyond which prices cannot be pushed by 
any extension of Credit, without breaking down the purchasing 
power of the world’s markets. Side by side, if not pari passu, with 
mercantile enterprise here, foreign competition has been progressing* 



Speculation, growing more and more reckless, has thrown goods 
upon the markets faster than they can be absorbed, producing an 
oppressive glut, beneath which prices must inevitably give way. 

With the first symptoms of such a result, renewals of Credit 
become more difficult, and sales of goods more imperative. Prices 
consequently recede further, and then further ; and the downward 
impulse being once given, it does not cease until the fall is out of 
all proportion to the previous gradual ris^ In two months of 1857, 
the average fall thns produced was over 30 per cent. ; and if the 
phenomena Avere not so startlingly distinct in the middle of 
1866, it was because the previous abnonnal position of our greatest 
staple trade had to some extent discounted the process. 

2nd — When prices begin to waver, the strain which commercial 
Credit preAnously bore, is thrown, not merely upon the reserves of 
loanable Capital, but upon those usually stable forms of Credit 
which are representative of public works, such as railways. These 
securities are always largely pledged, and the institutions holding 
them are at such times driven to realise at current values in 
exchange. This crucial test throws a new light upon the dangerous 
rapidity with which Capital has been fixed in these Avorks, and 
reveals hoAV far even Credit is committed to further works of 
postponed productiveness.*^ At a critical period such securities 
become practically useless — almost as if this great portion of the 
resources of the country had been sunk in the surrounding sea. I 
am inclined to think such a discovery one of the worst propogators 

* The aggregate of railway investment on the 1st July last -was upAvards 
of 400 milions, the greater portion of which has been tainted with discredit. 

Even the sinister speed of suspicion, however, cannot permeate so vast a mass 

as this during the usually brief stage of acute Panic. But as the first access of 

doubt is more than justified by the investigations to which it leads, the post- 

Panic period is now-a-days characterised by a chronic state of break-down 1 

in Railway Credit. The graphic account given by Mr. NeAvmarch (vol. 5) 

of the Railway <fiscredit in 1849, which AV'as said to have entailed a loss of 

180 millions sterling during one month only, exhibits a remarkable parallel 

to the events of 1867. 


of Panic, — only less fatal, indeed, than would be a doubt of the 
conA^’ortibility of the Bank note. It is as if an army, Avhile 
struggling with the enemy, should learn that its lines of leticat 

were in peril. 

jOf the natural sequel to these things, the failure of great banks, 
discount companies, and mercantile firms, I say nothing. They 
are the symptoms incident to the disease, not the disease itself. 
Nor is there much scientific interest in the circumstance that these 
revulsions usually occur in the Autumnal quarter,— a nile not 
without exception, as we saw in 1866. From causes well 
ascertained, there is in that quarter always an increase in the 
demand for ready money | and when Credit is aheady in its 
critical stage of inflation, this extra stress finds out the peccant 
link in the chain whose strength is the strength of its weakest 
part^ Possibly also the season of gloom and decadence may have 
a certain predisposing tendency. Men’s cretfos are scarcely so 
Augorous in the proverbial month of suicides as they are in the 

youth of the year. 

Through the normal cycle of credit we have now worked our 
way again to a point corresponding to that where I stated that 
Panic was “the destruction of a bundle of beliefs.” The road we 
haA’e traversed was found clearly enough divided into three stages : 

1. The Post-panic period, marked by plethora of reserve 

Capital, and dormancy of speculation. 

2. The Middle, or Revival period, marked by increasing trade, 

moderate speculation, and a sound state of Credit. 

3. The Speculative period, showing inflation of Credit, high 
range of prices, unproductive inA'estment, and excessive commit- 
ments ; and leading to Crisis and the end of the cycle. 

With each of these stages there appears to be a concun’cnt 
change in the mental mood of the trading public; and these 
changes are the same in each decade, and follow the same relative 
order. Commencing Avith the series of decennial crises, wo have 
here three inductions, mutually corroboratiA’e, and leading to a 









fourth and final generalisation, in the fact of a mental law which 
embraces and subordinates them all. Credit, then, we know to be 
a thing of growth through normal and predicable phases; and, 
under existing conditions, it is deciduous at intervals of about 
ten years. This conclusion is only a more formal statement of 
the “moral causes” which Mr. Langtou conjectured as under- 
l}ung his “decennial tides.” 

(jThe phenomenal results of the influences thus sketched will be 
found clearly illustrated in the Diagram, (pagi3-8) for which I am 
indebted to the kindness of my friend Professor Jevons, and which 
is intended to show, after elimination of the effects of accidental 
disturbance, the main lines of tendency through a type-cycle of 
Ci’edit, so far as they are ascertainable from existing materials. It 
should be clearly understood as designed to exhibit only the 

general character” of such a cycle of fluctuation. The three stages 
into which I have divided the inter-critical decade, though uniform 
in their order of succession, do, in fact, vary in length, and slide 
into each other so gradually, that the dark vertical lines which 
intersect the cur^^es sifter the third and sixth yc'ars must be taken 
only as approximate demarcations. 

The features of the Post -panic period are thrown into strong 
relief by the rapidly ascending curves of “Bullion” and “Bank- 
ing reserves,” contrasted with the steep descent of the lines 
“Inland Bills,” “Bills in Bank,” “Prices,” and “Rate of 
Discount.” An inverse, but more gradual movement, is shown in 
the lines traversing the middle, or active period. The story of the 
third, or speculative period, is well told in the progressively 
sharpening downward curve of the lines of “Bullion” and “Reserve,” 
and the general but unvaried movement of the lines of “ Inland 
Bills,” “Bills in Bank,” “Prices,” “Railway Expenditure,” “Bank- 
ruptcy,” and “Rate of Discount.” The two lines showing “Savings 
of the Working Classes,” and “ Pauperism,” are noticeable both in 
their relation to each other, (that of almost exact inversion) and to 
the general lines of tendency throughout tho cycle. The com- 




paratively tame deflections of “Bank” and “ Countiy Note 
Circulation” illustrate the steady and subordinate part played by the 
Bank note where there is an economising machinery of clearance, 
and where the note itself is issued only under conditions of absolute 
guarantee ; and the contrast between their character and that of the 
bold curves which track the decadence and developement of pure 
Credit, (bullion and reserve in one direction, and bills, prices, and 
rate of discount in the other) gives emphatic support to my position 
as to the chief factor in commercial fluctuations. .'IChe slight and brief 
lift in the line of “Bank Circulation” within the groove of 
“ Collapse,” will be recognised as resulting from the issues follow- 
ing tho temporary suspensions of the Bank Act. 

Thus far the subject of Commercial Credit has been trcated 
mainly as if its developement in a given course were the result of a 
single uncompounded law ; and this has been purposely done, with 
a view to bring my chief position into clearer relief than would 
have been possible, if the argument had been encumbered with 
references to modifying causes. The growth of Credit ?s, how- 
ever, constantly modified by the economic law of demand and 
supplj’, acting, through price, as between Credit and Capital, and 
tending to preserve the necessary equilibrium between them. I say 
“ the necessary equilibrium” because, in fact. Credit cannot long 
exist without it. Belief is founded upon evidence, and must be 
kept in contact with it. Commercial Credit, is based upon Capital, 
and the basis must be kept sufllcieutly broad for tho proportions of 
the superstructure. Descending to detail, we know that a bill of 
exchange, the concrete form of Commercial Credit, is nothing apait 
from the belief that at a specific date it will become actual Capital ; 
and the encashment of such bill, under discount, is merely a sale of 
that belief at a cash price. Subtract the belief from it and you 
may as well put the bill in the fire. It rests upon Capital, and upon 
Capital only. And what is true of the detail is true of the mass. 
The ratio of the growth of Credit prescribes the ratio of the demand 
for Capital, and, therefore, the rate of its hire. This brings in the 







MR. Jonx MILLS, 

adjusting element of price. Credit, •with its normal tendency to 
growth, can only grow under the stringent condition of paying a 
discount proportioned to the degree in which its growth outruns 
the supply of loan Capital. Experience and theory alike pronounce 
this necessity to he absolute. Here, therefore, "we are confronted with 
a new force, modifying the action of the primary force which impels 
Credit through its normal cycle. We have, in fact, one of those 
cases to which the axiom of Mr. Mill is applicable, — “The joint 
effect of causes is the sum of their separate effects, and we can 
no more omit consideration of the influence of the economic law of 
demand and supply on the developement of Credit, than the 
astronomer coixld leave out the tangential or centripetal tendency 
from his account of the planetary orbits. 

The economic law of Price, always benefleent in its action, is in no 
case more so then when it operates at the fountain head of mercantile 
resources. On the one hand its attractive; force upon Capital 
replenishes the reserves needful to sustain Credit, when the 
competition for loans has increased : on the other, by bearing 
more or less heavily on the sensitive surface of Profit, it applies an 
effective break to the dangerous velocity with which a too facile 
Credit would multiply transactions. In both ways it tends to 
preserve that natural and (to a country like this, which, besides 
trading so closely up to its own means, is a centre for the financial 
operations of the world) that vitally important equipoise between 
the growth of bill-making Credit, and the supply of Capital from 
accumulated profits and sa-rings. This it actually effects so long 
as the faculty of Credit is undiseased. We have seen something, 
and shall presently see more, of the reasons why it is not always 
so effectual. 

In following the course of the developement of Credit, some 
allusion was made to incidental disturbances which, for a time, 
seemed to mask the operation of the law of its growth. AVhen, 
however, we regard that law and the economic law of price in 

System of Logic, Yol. 1., Cap vi. 



their mutually modifying action, many of these apparent episodes 
fall into the general course of progression, and the line of inductive 
proof becomes more continuous. The Post-Panio period, being 
one of comparatively slight fluctuation, does not afford many 
‘illustrative instances, but we may cite two striking incidental 
exaggerations of Credit, and consequent demand for Capital, which 
occurred respectively about the commencement of the middle 
periods of the last two cycles. Putting an exceptional strain upon 
the corrective action of the economic law of price, and being quite 
different in their origins, these cases are the more valuable as 
proving a fortiori the case in respect of ordinary fluctuations. 
The first arose in 1852-3, when the great gold discoveries bogan to 
swell bullion reserves, to elevate the prices of commodities, 
and so to stimulate enterprise, just recovering from the dormant 
period extending from the collapse of 1847. Miith this new 
momentum added to its normal rate of growth. Credit was soon 
developed to great proportions, and was still further enlarged by 
an active import trade in wheat, which rose in price through the 
whole of 1853, attaining a maximum of 80s. lOd. per quarter m 
February, 1854. The creation of bills increased from an aggregate 
of £62,700,000 in the second quarter of 1852, to £88,140,000 in 
the third quarter of 1853; and the bullion reserves dwindling 
from a maximum of £21,880,000, to a minimum of £12,000,000, 
the rate of discount was raised by steps from 2 to 5^ per cent., 
when the needful supplies flowed in, and trade was carried on with 
ease and security. One indication of the rapidity and extent to 
which Capital responded to the call of Credit in this case, is the 
fact that, in 1853, £12,600,000 of Bullion was brought to the 
Mint, and passed into the circulation of the country. 

The second instance had a very different origin. In 1860-1, 
first the anticipation, and then the reality of the American civil 
war caused a great and rapid rise in the price of cotton, and gave 
the first start to the prices of other fibres and of general commodities, 
after the dormant period which followed the crisis of 1857. Great 



speculative activity led to the creation of bills to an extent which 
pressed heavily on the reserve of bullion. Owing to this pressure 
the hire of loans rose from 4 to 8 per cent., and the needful 
supplies being then attracted, the rate fell, in 1862, to 24 percent. 
During 1861 and 1862 the enormous aggregate of 17 millions of. 
buUion was coined at the Mint. It is further remarkable that in 
this case the corrective process was not even attended with any 
corresponding fall in general prices, the ratio of current profits 
being so high that trade was able to boar tlie increased cost of 
loans without retreating from the existing level of price. 

These cases are cited as distinctly exemplifying the process of 
adjustment which is constantly, if not always obviously, being 
carried out, so long as the two correlative laws, of growth of Credit, 
and demand and supply of Capital, are in free and healthy action. 
Having neither wish nor space to launch into (currency polemics, I 
may yet remark, in passing, that, from our present point of ^’iew, 
we discover little inducement to disturb the harmonious action of 
these natural forces by any such artificial appliance as that which 
meets with favour in many quarters, of answering the demand 
which is essentially a demand for Capital, by an extended issue of 
“ promises to pay.” The doctrine of equipoise between Credit and 
Capital — founded as it is upon the mental law of the dependence of 
belief upon fact — is a doctrine of perfect freedo/n, with the one sole 
condition of perfect honesty. To adulterate v ith the clement of 
Credit that circulating Capital which finally settles the transactions 
embodied for a time in the floating forms of Credit, is neither free 
trade nor fair trade ; while it is fatal to the balance of tendencies, 
on which the well-being of all trade is poised. To the extent that 
currency based upon Credit displaces curiTeney based upon its own 
reserve of A'isible Capital, it either neutralises the economic law of 
demand, or, reversing the poles of the magnet, it exerts a repellant 
instead of an attractive influence on foreign sujtplies. 

As the cycle enters its third, or speculative stage, we find that tliere 
is no need of any such artificial additions to the elements of danger. 


In this country Credit shows such natural vigour of growth, and it 
grows under such stimulating conditions, that any weighting of that 
side of the scale is quite out of the question. The time comes too soon 
when our two laws, while they continue to be correlative, tend to 
become less and less coefficient. The adjusting principle is still at 
work, but under the influences now gathering, it becomes by 
degrees overborne, and at last overwhelmed. The Credit end of the 
beam is too far depressed to be raised again until lightened of its load 
by a violent process. As this, however, is owing to the relative 
default of Capital, it is clear that no amount of paper promises, 
now placed in the opposite scale, would redress the balance. 

But how has this relative default of Capital arisen ? How is it 
that the economic law of demand and supply has itself ceased to 
redress the balance? Simply because enterprise has at length 
thrown itself into courses which cut us off from all the reservoirs 
of supply on which that law could act, and has hitherto acted, for 
our benefit. Banking reserves, the loan-fund on which current 
Credit is based, are replenished from domestic and foreign sources. 
The savings and floating balances of our people arc di'awn more 
largely into those reserves by an increased rate of interest. Other 
countries are laid under tribute, partly and mainly through the 
medium of ourforeign commerce, which brings some returns inbullion, 
and partly by direct foreign investment in the purchase of English 
bills. In highly speculative periods large drafts are made upon the 
reserves so procured, for permanent investment abroad, as in 
Government loans, or banking and industrial enterprises ; and still 
larger amounts are fixed in works of postponed productri cness at 
home. Now, it is not merely that the immense sums thus expended 
are taken from the common loan-fund on which Credit depends; 
a vast amount of labour is diverted from the production of the 
commodities which we should otherwise export to adjust the pay- 
ment for our imports, and establish a balance in our favour. In the 
meantime the extent of our commitments, and their probable effect 
upon Credit, are not unknown to foreigners, who become proportion- 


ately chary of buying English bills. In this way the domestic 
and foreign sources of the supply of loan Capital are simultane- 
ously cut off; elevation of the rate of discount ceases to produce 
its accustomed effects ; and nothing remains but for the inverted 
pyramid of Credit to fall by its own weight. 

It appears, therefore, that at a period of diseased overgrowth of 
Credit, the economic law of demand acting upon the price of loan- 
Capital, — though it still exerts some corrective influence, and at 
any rate acts as a storm- warning, like the hoisting of a Fitzroy 
drum, — does not, for the reasons just assigned, succeed in maintain- 
ing the etjuipoise which is our only guarantee against disaster. 

Having already referred to the mischievous effect which would 
follow the common proposal of extended issues of currency at a 
time when normal influences were fully capable of controUing all 
fluctuations, we may well consider what would be the results of 
such a policy when Credit has reached its dangerous state of 

If you could not at that earlier and healthier period sustain the 
edifice of Credit upon a mere Credit curi’ency, how are you to do 
so now ? It is exactly the relative excess of promises over the 
power of performance that is the most salient symptom of the 
disease ; a proposal to add more promises to the number is not a very 
hopeful application of the doctrine similid similihis curantur. 
You may say that these notes are convertible into gold on demand; 
but your hypothetical gold basis may be already rapidly diminish- 
ing under the action of adverse foreign exchanges. You cannot 
induce foreigners to accept your promises in payment, and if you 
obtain for these a domestic circulation, by that means keeping up 
the volume of Credit and the high range of juices, you simply set 
free and displace a proportionate amount of the gold which alone is 
effective in discharging our balances. And then when the postponed 
but inevitable revulsion arrives, you have merely succeeded in 
adding to aU other critical phenomena the currency Panic from 
which we have been happily free since 1844. This is not a matter 


of theory alone. The experiment has been amply tried. During 
the great foreign speculations which led to the crisis of 1825, the 
Bank of England, conscious of danger, reduced her issues some 
2^ millions in 1824; but the private and joint stock Banks in 
the same period expanded their issues about 4^ millions, and 70 
of these Banks were swept out of existence for their zeal in thus 
providing “ an elastic currency.” In the three years that preceded 
the crisis of 1836-9 exactly the same process was carried out, and 
with exactly similar results. On reference to the Diagram (p. 8) 
it will be observed that even under the present regulated system, 
the line indicating the amount of “Country circulation” maintains its 
upward direction long after the line of “Bank circulation” has 
taken a downward curve; showing, (1.) that an adverse foreign 
exchange acts primarily on the central reserve, which is our most 
sensitive Credit meter— and (2.) that the desired “ free issues ” 
would merely strengthen the influences which baffle the corrective 
action of economic law, and would pro tanto exaggerate the evils 
of a crisis already inevitable. 

It is true that at three successive decennial periods, the worst 
features of Panic have been mitigated by a permission to issue bank 
notes which had no claim to be considered as transferable gold 
warrants. It must be remembered, however, that when Panic has 
once supervened, the nature of the problem is entirely changed. 
My conclusions have been founded on the composite action of the 
mental law of growth of Credit and the eccnomic law of demand 
and supply. But at the period of crisis Credit has no growth— it 
is for the moment suspended. If one factor has ceased to exist, 
you cannot work out the problem with the other. The crisis had 
really commenced when, as we saw, the drawing power of price 
upon Capital was overborne by the diseased activity of Credit, and 
when the stimulus of a further addition to it would merely have 
aggravated the coming disaster : but in this latter stage a stage 
of suspended animation — a stimulus is the very thing required. 
The galvanism applied to a paralysed limb, and the air pumped 



into the lungs of a drowned man, arc neither of them vital forces, 
acting under an organic law : hut they may prove excellent 
artificial appliances to cases of exceptional and urgent need. 

But the success of this departure from sound economic principle, 
itself testifies to the value of that principle in its normal working. 
A small issue of notes in excess of the gold basis — nay, the very 
knowledge of their becoming accessible — acts like magic upon the 
chaos of general doubt and confusion ; and the expressions of 
wonder which always greet this display of cosmical energy would 
be in no degree misplaced if the energy resided in a modicum of 
paper currency as such. It really resides, however, in the mental 
association which Bank of England notes have already acquired 
with the absolute security derived from their ordinai’y basis of gold. 
The known common condition of their issue constitutes them 
Capital ; and the mental effects they produce as Capital are 
fortunately continued even in the momentar}- interval when they 
cease to be such. Could any more striking proof be given that a 
currency which is Capital is the most natural basis for Credit in 
ordinary times ? 

I am now perhaps fairly open to the query, “Is there no remedy 
for Commercial Panics ? Is it a fatal necessity that Credit must 
grow rank and rotten, and collapse in a spasm of terror ? Must 
we at the end of every ten years resign ourselves to a ruinous 
convulsion, as to some mysterious decree of Providence ?” I can 
only answer that, though not looking forward to any trade 
millenium, blest with entire immunity from disaster, it may be 
fairly hoped that the cycles of Credit can be indefinitely lengthened, 
and the evils which mark their close greatly mitigated. The 
philosophy of this matter recognises as little of Fate as it does of 
Chance. But the first step must be to remove the question from 
the realm of mystery to that of knowledge. "We can grapple with 
what we know. And as we have found moral causes lying at the 
root of these changes, it is to moral means in the main that we 
must look for controlling them. My prescription, therefore, is but 


the old-fashioned one of Education, — the special Education of our 
trading classes in those scientific truths, bearing on the creation 
and distribution of wealth, the ultimate lesson of which is embodied 
in many a shrewd old aphorism which wc are equally apt to quote 
in words and-to neglect in practice.' The commercial department 
of education is at present mainly a matter of “the three B’s,” 
with an addendum of Book-keeping. I fear our middle-class 
schools do not much concern themselves with the principles which 
underlie the phenomena of Exchange, of Credit, and of Capital, 
nor with that appeal to moral sanctions in connection with these, 
which should strengthen the mind against a blind energy of tem- 
perament and a hasty instinct of gain. Educate, indeed, as we 
may. Credit will always fulfil its own law of growth ; and as you 
cannot endow all men with caution and conscience, the growth will 
still tend, at intervals to degenerate into a critical rankness ; but it 
is very sure that, to the extent in which you increase the average 
intelligence, and elevate the average moral tone, you co-operate 
with the conservative action of economic law on the equilibrium of 
Credit and Capital. It is the liability to an ignorant speculative 
excitement, and a willingness to take immoral risks, which ulti- 
mately put the growth of Credit beyond the control of the price of 
loan Capital. Diminish those, and the cycle may then expand 
beyond its customary decade. 

To some, who have been accustomed to denounce the sinistef 
action of a class of freebooters and wreckers in the financial world 
as the true cause of Panics, the idea of forces essentially inde- 
pendent of such action, and following a course normal of develope- 
ment. Will be specially unwelcome. But, while I should be sorry 
in any degree to weaken the sentiment of just indignation which 
is being every where expressed against conduct that has blackened 
the commercial annals of the last few years, I venture to think 
there would be small gain in deliberately ignoring, on that account^ 
any evidence we can obtain as to influences that are actii e on the 
great scale in preparing a suitable field for the exercise of such un- 

scrupulous cunning and rapacity. For it must not be forgotten that 
the tendencies whose order of progression has been sketched, 
operate upon the broad aggi’egatc of the commercial and investing 
community, — not upon the exceptional Macheaths and Turpins who 
infest its ranks, and whose predatory instincts know no orderly 
succession of phases, but are unchangeably vicious and vigilant. 
A parallel reflection applies to the suggested remedy. Ameliorate 
the general mental conditions of commerce, and you proportionately 
limit the sphere and powers of designing knaves. In any case, 
commercial ethics, which are clear and immutable, dealing only 
with conduct, can put no bar to the scientific process which seeks 
only the explanation of facts. 

To others it may appear a fanatical doctrine that the schoolmaster, 
rather than the legislator, is the magician who is to steady our 
rates of discount, and save Lombard street from its decennial fits of 
ten-or. But why is this to be thought more fanatical than the 
proposal to relegate our working classes to the same agency, when 
they fall into mischievous economical heresies, or when their 
standard of workmanship drops below that of their continental 
brethren ? 

So far as these northern districts are concerned, the Cobden chair 
of Political Economy at Owens College, at present so ably filled, 
might become a centre from which should radiate the remedial 
influences which I ventui'o to suggest. In matters of monetaiy 
science I believe Manchester to be sounder than most other Com- 
mercial communities; and that very fact imposes upon her the 
obligation to employ her great resources in diffusing the special 
kind of culture required to diminish the disasters we are met to 

3> o ^ 2i 

MR. JOHN Mins,